Companies Act Case Law AI Champdany Industries Limited Vs The Official Liquidator

Companies Act Case Law

AI Champdany Industries Limited Vs The Official Liquidator

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 1118 OF 2009
(Arising out of SLP (C) No.15285 of 2008)

 

AI Champdany Industries Limited … Appellant

Versus

The Official Liquidator & Anr. … Respondents
JUDGMENT

 

S.B. Sinha, J.

 

1. Leave granted.

2. Wool-Combers of India Limited (the company) went in liquidation.

Appellant purchased assets of the company in liquidation in a court sale for

a consolidated sum of Rs.7,03,00,000/-. Sale was confirmed by the learned

Company Judge by an Order dated 15th September, 2006.
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3. Appellant was served with a notice dated 15-02-2007 by Bhatpara

Municipality claiming payment of arrears of property tax amounting to

Rs.47,59,597.19/- for the period from 1991-1992 and 2006-2007, stating :

“that before adopting the said stringent measure
for realizing the arrear property tax once again
give you and opportunity to pay all arrear property
tax in respect of the said holdings being 1/, West
Ghoshpara Road, Ward No. 12, amounting to
Rs.47,59,597.19/- plus statutory interest within
seven days from the receipt thereof.”
4. Appellant contends that it has no liability to pay the said dues and the

same has to be adjusted from the sale proceeds. It is furthermore stated that

on and from the date of purchase it had paid all municipal rates and taxes

subsequent to the date of sale.

Appellant on receipt of the said notice took out a Chamber Summons

praying, inter alia, for the following reliefs :

“(a) Necessary clarification be made that Sale
confirmed in favour of applicant by order dated
15th September, 2006 would make the applicant
liable for payment of property tax only on and
from the date of confirmation of sale i.e. 15th
September, 2006 and not for any period prior
thereto;

(b) Order dated 15th September, 2006 be suitably
modified and/or clarified in terms of prayers
above;
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(c) Injunction restraining the respondent no. 2 from
claiming any alleged arrear property tax for period
prior to 15th September, 2006;

(d) Direction be given to the respondent no. 2 lodge
its claim before the Official Liquidator for any
alleged claim on account of property tax for period
prior to 15th September, 2006.

(e) Injunction restraining the respondent no. 2 from
giving any effect and/or further effect to the notice
dated 15th February, 2007 and 6th March, 2007
being Annexures “E” and “G” respectively to the
affidavit in support of this summons;

(f) Ad-interim orders in terms of prayers above;

(g) Costs of and/or incidental to this application be
paid by the respondent no. 2;

(h) Such further and/or other order or orders as this
Hon’ble Court may deem fit and proper.”

 

5. By reason of an order dated 7th February, 2008, the said application

has been dismissed, stating :

“Having considered the submissions of the parties
the terms “as is where is basis and whatever there
is basis” signifies, the condition, quality and the
quantity in which the assets sold, exists. It does
not take into account the liabilities attached to the
assets sold. The terms and conditions of sale,
however, called upon the bidders to satisfy
themselves regarding title and encumbrance
attached to the said asset. Encumbrance would
include the liability attached to the asset including
the tax payable. Therefore, it was incumbent upon
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the purchaser to make enquiry regarding liabilities
(to be read as encumbrance) attached to the asset
before making the offer, The tax payable to the
municipality is one such encumbrance and for not
making enquiry the petitioner cannot avoid
payment.”

 

6. An intra court appeal preferred thereagainst has been dismissed by a

Division Bench of the said court.

7. Mr. Sunil Kumar, learned senior counsel, in support of this appeal,

would contend that a purchaser is not liable to pay the property tax prior to

the date of purchase and remedy of the respondent municipality, if any, was

to have its claim satisfied from the sale proceeds in terms of Sections 529

and 529A of the Companies Act, 1956.

8. Mr. Sibaji Sen, learned senior counsel appearing on behalf of the

respondent-Municipal Corporation, on the other hand, would draw our

attention to the advertisement for sale to contend that the appellant had a

duty to make an enquiry in regard to the Company’s encumbrance as also in

terms of the provisions of Sections 55(1) and 55(2)(g) of the Transfer of

Property Act.

The learned counsel appearing on behalf of the official liquidator

would support the said contention.
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9. The company went in liquidation. It was directed to be wound up.

The official liquidator indisputably took charge of both movable and

immovable assets of the company. The fact that the company went in

liquidation was given due publicity. Respondent-Municipality did not file

its claim before the official liquidator. It did not stand in queue to get the

same recovered and/or adjusted from the sale proceeds.

Indisputably the manner in which the claim of a creditor in respect of

the dues of the company in liquidation is to be realized has been laid down

in Sections 529 and 529A of the Companies Act, 1956.

10. Dues in relation to the Municipal Tax in terms of the provisions of the

said Act do not create any encumbrance on the property. It does not create

any charge. It is considered to be a personal liability. On the

aforementioned premise, we have to construe the terms and conditions of

sale. It reads as under :

“1. The sale will be held as per inventory made by the
Valuer on “As is Where is And Whatever There is” basis
and subject to confirmation by the Hon’ble High Court at
Calcutta. The Official Liquidator shall not provide any
guarantee and/or warranty as to the quality, quantity or
specification of the assets sold. The Offerers/Bidders are
to satisfy themselves in this regard after physical
inspection of the assets/properties as to the title,
encumbrance, area, boundary, measurement, description
etc. of the Company (in Liquidation) and the purchasers
will be deemed to offer with full knowledge as to the
defects, if any in the descriptions, quality or quantity of
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the assets sold. The Official Liquidator shall not
entertain any complaint in this regard after the sale is
over. Any mistake in the notice inviting tender shall not
vitiate the sale.”
11. Both the learned Single Judge as also the Division Bench of the High

Court held that having regard to the fact that an inventory was made on “as

is where is and whatever there is” basis and furthermore in view of the fact

that a duty was cast upon the offerer to satisfy themselves in regard to the

physical inspection of the assets/properties as to the title, encumbrance,

area, boundary, measurement, description etc. of the assets of the company

in liquidation and the purchaser would be deemed to be offering his prices

therefor with full knowledge as to the defects containing the descriptions,

quality or quantity of the assets sold, the appellant was bound to make an

investigation in regard to the liabilities of the company in liquidation.

12. The terms and conditions of the sale must be read as a whole. It must

be given a purposive meaning.

The word `encumbrance’ in relation to the word `immovable

property’ carries a distinct meaning. It ordinarily cannot be assigned a

general and/or dictionary meaning. We may however notice some

dictionary meanings of the said word as reliance thereupon has been placed

by Mr. Sibaji Sen.
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In Stroud’s Judicial Dictionary of Words and Phrases 5th Edition

Encumbrance is defined as “being, `a claim, lien, or liability, attached to

property’; and this definition is wide enough to cover the plaintiff’s claim,”

which was, as assignee for value of a reversionary interest, against a

person coming in under a subsequent title.”

In Supreme Court on Words and Phrases it is stated that “the word

`encumbrance’ means a burden or charge upon property or a claim or lien

upon an estate or on the land.”

In Advanced Law Lexicon Encumbrance is defined as “an

infringement of another’s right or intrusion on another’s property.”

In Black’s Law Dictionary Encumbrance is defined as “any right to,

or interest in, land which may subsist in another to diminution of its value,

but consistent with the passing of the fee.”

13. Encumbrance, therefore, must be capable of being found out either on

inspection of the land or the office of Registrar or a statutory authority. A

charge, burden or any other thing which impairs the use of the land or

depreciates in its value may be a mortgage or a deed of trust or a lien or an

easement. Encumbrance thus must be a charge on the property. It must run

with the property. If by a reason of the statute no such burden on the title

which diminishes the value of the land is created, it shall not constitute any

encumbrance.
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14. If the property tax was merely a statutory dues without creating any

encumbrance on the property which had cast a duty upon all the auction

purchasers to make an investigation, it would mean that he must try to find

out all the liabilities of the company in liquidation in their entirety.

Respondent-Municipality was an unsecured creditor. In that capacity it

cannot stand on a higher footing than an ordinary unsecured creditor who is

required to stand in queue with all others similarly situated for the purpose

of realization of their dues from the sale proceeds.

15. Companies Act or any other law does not impose any additional

obligation upon the purchaser to make an enquiry with regard to the

liabilities of the companies other than those which would impede its value.

Reliance has been placed by Mr. Sen on a decision reported in

Ahmedabad Municipality Vs. Haji Abdul [AIR 1971 SC 1201] wherein it

was held :

“The plaintiff purchased the property in November, 1954
and in our opinion it could not have reasonably been
expected by him that the receivers would not have paid
to the municipal corporation, since 1949 the taxes and
other dues which were charged on this property by
statute. According to Section 61 of the Provincial
Insolvency Act, 1920 the debts due to a local authority
are given priority, being bracketed along with the debts
due to the State.”
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We may notice that Section 141 of the Bombay Provincial Municipal

Corporation Act provides that the property taxes to be a first charge on the

premise for which they are assessed. It is in that view of the matter Section

100 of the Transfer of Property Act was found to be capable of being

invoked therein, which reads as under :

“100.Charges – Where immoveable property of one
person is by act of parties or operation of law made
security for the payment of money to another, and the
transaction does not amount to a mortgage, the latter
person is said to have a charge on the property; and all
the provisions hereinbefore contained which apply to a
simple mortgage shall, so far as may be, apply to such
charge.
Nothing in this section applies to the charge of a trustee
on the trust-property for expenses properly incurred in
the execution of his trust, and, save as otherwise
expressly provided by any law for the time being in
force, no charge shall be enforced against any property in
the hands of a person to whom such property has been
transferred for consideration and without notice of the
charge.”

 

16. There cannot, thus, be any doubt or dispute that a provision of law

must expressly provide for an enforcement of a charge against the property

in the hands of the transferee for value without notice to the charge and not

merely create a charge.

17. In Ahemdabad Municipality itself it was held :

“According to the submission it is not necessary for the
saving provision to expressly provide for the
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enforceability of the charge against the property in the
hands of a transferee for consideration without notice
of the charge. This submission is unacceptable
because, as already observed, what is enacted in the
second half of Section 100 of Transfer of Property Act
is the general prohibition that no charge shall be
enforced against any property in the hands of a
transferee for consideration without notice of the
charge and the exception to this general rule must be
expressly provided by law. The real core of the saving
provision of law must be not mere enforceability of the
charge against the property charged but enforceability
of the charge against the said property in the hands of a
transferee for consideration without notice of the
charge. Section 141 of the Bombay Municipal Act is
clearly not such a provision. The second contention
accordingly fails and is repelled.”
It was further more held :

“Reliance was next placed on a Full Bench decision of
the Allahabad High Court in Nawal Kishore V. The
Municipal Board, Agra, ILR (1943). All 453 = (AIR
1943 All 115 (FB)). According to this decision the
question of constructive notice is a question of fact
which falls to be determined on the evidence and
circumstances of each case. But that Court felt that
there was a principle on which question of constructive
notice could rest, that principle being that all intending
purchasers of the property in municipal areas where the
property is subject to a municipal tax which has been
made a charge on the property by statute have a
constructive knowledge of the tax and of the possibility
of some arrears being due with the result that it
becomes their duty before acquiring the property to
make enquiries as to the amount of tax which is due or
which may be due and if they fail to make this enquiry
such failure amounts to a wilful abstention or gross
negligence within the meaning of Section 3 of the
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Transfer of Property Act and notice must be imputed to
them.”
18. Clause (g) of Sub-section (1) of Section 55 of the Transfer of

Property Act whereupon reliance has been placed by Mr. Sen reads as under

:

“In the absence of a contract to the contrary, the buyer and
the seller of immoveable property respectively are subject to
the liabilities, and have the rights, mentioned in the rules
next following, or such of them as are applicable to the
property sold:-
(1) The seller is bound –

(g) to pay all public charges and rent accrued
due in respect of the property up to the date of
the sale, the interest on all encumbrances on
such property due on such date, and, except
where the property is sold subject to
encumbrances, to discharge all encumbrances
on the property then existing.”

 

19. In terms of the aforementioned provisions, therefore, the seller is

bound to pay all public charges due in respect of the property upto the date

of sale, when a property is sold in auction. Section 55 refers to a contract

only. Unless there is a contract to the contrary, the rights and obligations of

the parties to a sale would be as indicated in Section 55. Such a contract to
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the contrary must be express and not implied, as a result whereof the

meaning of term encumbrance would be expanded.
The advertisement did not specify that all public charges have to be

paid.
Municipal Corporation indisputably is not a preferential creditor.

Companies Act in relation to winding up of proceeding is otherwise a

special law. While distributing the assets between the creditors and

unsecured creditors, the provisions of Sections 529 and 530 must be

complied with.

20. All claims against the companies were required to be filed before the

liquidator until the property was sold as provided for under Section 457 of

the Companies Act. In terms of Section 456 thereof once an order for

winding up is made the liquidator has to take into custody the properties,

effects and actionable claims to which the company is or appears to be

entitled. Section 528 provides that all debts payable on a contingency and

all claims against the company, present or future are admissible to proof

against the company. Section 529 provides for the same rule as in force for

the time being under the law of insolvency with respect to the estates of
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persons adjudged insolvent. Section 530 provides for certain priorities to

secured creditors and other unsecured creditors.
Once the property is sold, the assets of the company are required to be

distributed to the creditors in order of preference. As the respondent-

Municipality was not a secured creditor, the impugned Judgment cannot be

sustained.

21. Almost a similar question in regard to the dues of the electrical

charges came up for consideration before this Court in Isha Marbles Vs.

Bihar State Electricity Board and Anr. [1995 (2) SCC 648]. In that case

sale of the assets of industrial undertaking took place in terms of the

provisions of the State Financial Corporation Act, 1951. Having regard to

the provisions of the Indian Electricity Act, 1910 a three Judge Bench of

this Court held that a liability on the purchaser cannot be imposed which

was not incurred by them stating :

“63. We are clearly of the opinion that there is great
reason and justice in holding as above. Electricity is
public property. Law, in its majesty, benignly protects
public property and behoves everyone to respect
public property. Hence, the courts must be zealous in
this regard. But, the law, as it stands, is inadequate to
enforce the liability of the previous contracting party
against the auction-purchaser who is a third party and
is in no way connected with the previous
owner/occupier. It may not be correct to state, if we
hold as we have done above, it would permit
dishonest consumers transferring their units from one
hand to another, from time to time, infinitum without
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the payment of the dues to the extent of lakhs and
lakhs of rupees and each one of them can easily say
that he is not liable for the liability of the predecessor
in interest. No doubt, dishonest consumers cannot be
allowed to play truant with the public property but
inadequacy of the law can hardly be a substitute for
overzealousness.”
22. Dues of the Municipality would also not even otherwise come within

the purview of the crown debt. Even a crown debt could be discharged only

after the secured creditors stand discharged.

 

23. In Union of India & Ors. Vs. Sicom Ltd. & Anr. [2009 (1) SCALE

10], it is stated :

“11. Generally, the rights of the crown to recover the
debt would prevail over the right of a subject. Crown
debt means the debts due to the State or the king; debts
which a prerogative entitles the Crown to claim priority
for before all other creditors. [See Advanced Law
Lexicon by P. Ramanatha Aiyear (3rd Edn.) p. 1147].
Such creditors, however, must be held to mean
unsecured creditors. Principle of Crown debt as such
pertains to the common law principle. A common law
which is a law within the meaning of Article 13 of the
Constitution is saved in terms of Article 372 thereof.
Those principles of common law, thus, which were
existing at the time of coming into force of the
Constitution of India are saved by reason of the
aforementioned provision. A debt which is secured or
which by reason of the provisions of a statute becomes
the first charge over the property having regard to the
plain meaning of Article 372 of the Constitution of
India must be held to prevail over the Crown debt
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which is an unsecured one. It is trite that when a
Parliament or State Legislature makes an enactment,
the same would prevail over the common law.
12. Thus, the common law principle which was
existing on the date of coming into force of the
Constitution of India must yield to a statutory
provision.
13. To achieve the same purpose, the Parliament
as also the State Legislatures inserted provisions in
various statutes, some of which have been referred to
hereinbefore providing that the statutory dues shall be
the first charge over the properties of the tax-payer.
This aspect of the matter has been considered by this
Court in a series of judgments.”

 

24. For the reasons aforementioned, the impugned judgment cannot be

sustained. It is set aside accordingly. The appeal is allowed with costs.

Counsel’s fee assessed at Rs.10,000/-

 

………………………….J.
[S.B. Sinha]

 

…………………………..J.
[Asok Kumar Ganguly]
New Delhi;
February 19, 2009

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